Talk:Covered option

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Cleanup required[edit]

This page definitely did need cleanup. If anybody can make better graphs, please do. The references, examples etc. at the bottom are probably all part of the old sales job. Can anybody figure out which are legit? Thanks Smallbones 14:09, 12 February 2006 (UTC)[reply]

POV content[edit]

Much of this article consists of unsourced POV on "why covered call is a bad strategy". Looks unencyclopedic to me. 69.63.62.226 00:04, 27 May 2006 (UTC)[reply]

See the Fisher Black article cited.

See also James W. Yates, Jr. and Robert W. Kopprasch, Jr. "Writing Covered Call Options: Profits and Risks," Journal of Portfolio Management 7 (Fall 1980)

and

Frank K. Reilly and Keith C. Brown, Investment Analysis and Portfolio Management, 7th edition, Thompson Southwestern, 2003, pp. 994-5. (This is the main investment text for the CFA exam)

e.g. "To be profitable, the covered call strategy requires that the investor guess correctly that share values will remain in a reasonably narrow band around their present levels." p. 995

I do not think that "covered call is a bad strategy" but it is often oversold by disreputable brokers looking for a quick commission. Smallbones

Removed references to those studies, since by their very virtue, covered calls do not hedge loss and cut off upside. This is shown in the illustration. However, if anyone feels thos mentions add materially to the article, they can certainly add them back in. Just trying to clean things up.

Netsumdisc 23:02, 2 April 2007 (UTC)[reply]

bias to sell covered calls[edit]

There certainly has been a bias that has repeatedly returned to this article about how covered calls are a safe investment. The most recent version of this I have reverted. On it's face it is a simple (unattributed) mathematical calculation, showing what happens if the stock price increases, or if the stock price stays unchanged. But what about if the stock price decreases???

Leaving this out is certainly biased. So I will removed the biased edit. A bigger question is why (or who says) this calculation is relevant? I'll remove similar material unless it is referenced, e.g. textbook A says ".." or The Wall Street Journal says "..." Offending text follows.

Smallbones 15:33, 17 October 2007 (UTC)[reply]

Return Calculations A convenient methodology for comparing covered call positions is via the parameters %if unchanged and %if assigned. The parameter %if unchanged represents the amount of profit for a covered call position assuming the price of the underlying stock is unchanged at the expiration of the call option. The parameter %if assigned represents the return of the covered call position assuming the price of the stock is at or above the strike price of the call option at the expiration of the call option. The parameters %if unchanged and %if assigned are identical if the initial covered call position selected was in-the-money (ITM).

%if unchanged The calculation for %if unchanged is:

%if unchanged = option premium/(stock price – option premium)

For XYZ above, the calculation is:

%if unchanged(XYZ) = $1/($33 - $1)

%if unchanged(XYZ) = 3.1%

%if assigned The calculation for %if assigned is:

%if assigned = (option premium + profit/loss on stock)/(stock price - option premium)

Assuming the price of XYZ is $35 or greater at the expiration of the call option, the calculation for %if assigned is:

%if assigned(XYZ) = ($1 + $2)/($33 - $1)

%if assigned(XYZ) = 9.4%

Agree. It's unclear how this material benefits the article. Ronnotel 03:25, 18 October 2007 (UTC)[reply]

Section on examples[edit]

(NB: moved following text here as per WP:TALK):

Adding a reference to "Samples of Investment Products Designed to Invest in Covered Calls" certainly is relevant to an encyclopedia article about covered calls; this reference allows investors the chance to more fully evaluate the strategy and the pros and cons of investment options (just as it would be appropriate to consider stock funds or bond funds when evaluating equities or fixed income). —Preceding unsigned comment added by Optionportfolio (talk • contribs) 22:17, 5 January 2008 (UTC)[reply]

The examples you added are inappropriate for this page as per WP:SPAM and WP:EL. Ronnotel (talk) 02:08, 6 January 2008 (UTC)[reply]

The example with $10,000 worth of stock and you sell $7,500 in calls means that you can lose $7,500 in the underlying price of the stock and still break even not $2500. Remii68 (talk) 02:27, 27 October 2008 (UTC)[reply]

What does this mean, "If XYZ trades at $33 and July 35 call trades at $1, than either can purchase 100 shares of XYZ and only sell one call." It looks like it is grammatically incorrect but I won't edit it because I am just starting to learn about covered calls. Smmich (talk) 04:28, 15 November 2008 (UTC)[reply]

Overall style[edit]

While doing research for covered calls, I found this article. The writing style makes for unclear and seemingly contradictory information. (For example, "Even though there is limited upside and the premium is subtracted, covered calls do not suffer loss as there is complete risk of loss" references the concept of "risk of loss" but does not explain how it applies to covered calls, thus leading to potential confusion among readers who are not familiar with the subject.) I'd like to add the copyedit tag to the article. I'd clean it up myself, but I do not know enough about the subject so I could not be sure my rewrites would be accurate. Ometecuhtli2001 (talk) 16:52, 8 October 2008 (UTC)[reply]

It would definitely be nice if the "Examples" section could be edited by someone that speaks English. It's virtually unintelligible as it stands. —Preceding unsigned comment added by 69.120.140.170 (talk) 23:53, 21 October 2008 (UTC)[reply]

I completely agree. the phrase "do not suffer loss as there is complete risk of loss" is contradictory and makes no sense. Remii68 (talk) 02:12, 27 October 2008 (UTC)[reply]

I added the copyedit tag just now. Chances are it may need the cleanup-confusing and/or expert-subject tags. I was tempted to use cleanup-confusing, but that has not been discussed so I thought it improper to do so at this time. Ometecuhtli2001 (talk) 06:43, 1 November 2008 (UTC)[reply]

I changed the tag to expert-subject, as it is totally confusing, and copy-editing by a decent editor with no idea about the subject (like me) would probably mess up what ever good information does exist here. NJGW (talk) 19:25, 1 November 2008 (UTC)[reply]

This entire section is very confusing and does little to clarify an already complicated subject. Give it the Tobacco Road treatment, that is to say, blow it up and start all over again. Smmich (talk) 04:26, 15 November 2008 (UTC)[reply]

Active Management of a Covered Call[edit]

Gregp123 (talk) 19:33, 1 November 2011 (UTC) ^[1]Most experts in the stock market will generally say, “the writer of an options is foregoing any increase in stock price that exceeds the strike price for the premium received when selling calls. The option writer continues to bear the risk of a sharp decline in the price of the stock. The cash premium will only offset this loss.” This is not correct based on the active management of a covered call.[reply]

With the active managed method, the call writer no longer cares about the price of the stock that was purchased. When the stock does go down, the call writer would buy back the option at an inexpensive cost and immediately write a new option. For example, the call writer received a premium of $3.00 and closed it at $0.25 when the stock price dropped. If the stock price went down $5.00, the call writer would write a new call at at a $5 lower strike price. This may net an addition premium of $3.00 so when you add the premiums minus the buy back of the first option we have $5.75 while the stock only dropped $5.00. The second premium helped to offset the loss from the strike price.

When the stock does not reach the strike price, let the option expire, keep the premium, and write a new call at the same strike price. When the stock price goes above the call strike price, buy back the call option and write a new option at a higher strike price to reflect the gain in the stock. the second premium will help defray the cost of the buyback while you have a gain in the stock price.

For the buyer, options are a wasting asset as time decay erodes value. The time value portion of a option is always zero at expiration. Selling the time value repeatedly on the same stock makes option income work best for you.

With the active trading method, the call writer will not be waiting on the stock price to go up to make money. You will make money on the wasting time value of options you have sold. This will change your investing philosophy about the stock market.

References

^ Pugh, Greg. "Professional investor". http://getrichinvestments.com. Retrieved 11/1/2011. {{cite web}}: Check date values in: |accessdate= (help); External link in |publisher= (help)

'Money' vs. 'Value'[edit]

This article, along with many others, uses the term interchangeably. If you hold a stock, and it goes down in value, you have not lost money unless you sell the stock for less than your cost; if you instead continue to hold the stock, it may increase in value subsequently.

Options are a 'short' term ('buying' time, as per above explanation), lower cost way to speculate on stock prices, and/or a way to boost or lock-in returns for those who hold stocks for a 'longer' term.

Rewrite[edit]

I am going to be re-writing this article, FYI. Let me know if I mess anything up! TraderCharlotte (talk) 20:18, 22 March 2022 (UTC)[reply]

Note on source "Tastytrade"[edit]

Just wanted to put a note here on a source I'm citing in the new version of this article. See this discussion for information on this source. TraderCharlotte (talk) 18:51, 10 April 2022 (UTC)[reply]

Also see my sorta-COI disclosure there. TraderCharlotte (talk) 19:18, 10 April 2022 (UTC)[reply]

[1] Pugh, Greg. "Professional investor". http://getrichinvestments.com. Retrieved 11/1/2011. {{cite web}}: Check date values in: |accessdate= (help); External link in |publisher= (help)

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